What is a Face-Amount Certificate Company?
A face-amount certificate company is a company that borrows from investors and offers its assets or other securities as collateral.
How Does a Face-Amount Certificate Company Work?
To raise the money, Company XYZ asks a group of investors to lend it $10 million. It offers the assets of its existing portfolio of investments as . Because the debt is collateralized, Company XYZ offers to pay the lending investors a lower rate of 5% for five years. The investors receive certificates good for the amount they've lent to Company XYZ.
This amount, the face amount, is the principal on which the investor will earn interest from Company XYZ. The investors can redeem their certificates at maturity for the face value; alternatively, they can redeem the certificates early for a predetermined surrender value.
The investors agree, and Company XYZ proceeds to pay the lending investors $500,000 of interest each year. At the end of the fifth year, the company repays the $10 million.
Why Does a Face-Amount Certificate Company Matter?
Face-amount certificate companies are rare, but they are able to get cheaper financing because they are able to collateralize their debt with assets that they can control. Their method of financing is regulated by the Investment Company Act of 1940.